BILL ANALYSIS                                                                                                                                                                                                    







                      SENATE COMMITTEE ON PUBLIC SAFETY
                             Senator Mark Leno, Chair                A
                             2009-2010 Regular Session               B

                                                                     8
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          AB 819 (Calderon)                                           
          As Amended July 9, 2009 
          Hearing date:  July 14, 2009
          Penal Code (URGENCY)
          JM:mc

                                INTELLECTUAL PROPERTY:

                          PIRACY PREVENTION AND PROSECUTION  


                                       HISTORY

          Source:  Author

          Prior Legislation: AB 2750 (Krekorian) - Ch. 468, Stats. 2009
                       AB 64 (Cohn) - Ch. 9, Stats. 2006
                       SB 1506 (Murray) - Ch. 617, Stats. 2005
                       SB 438 (Johnston) - Ch. 906, Stats. 1998

          Support: Unknown

          Opposition:None known

          Assembly Floor Vote:  Ayes 77 - Noes 0


                                           
                                     KEY ISSUES
           
          SHOULD THE OFFICE OF THE ATTORNEY GENERAL INCLUDE A DIVISION OF  
          ORGANIZED CRIME AND INTELLECTUAL PROPERTY PIRACY (OCIP) TO  
          INVESTIGATE AND PROSECUTE INTELLECTUAL PROPERTY PIRACY,  
          ESPECIALLY MOVIE PIRACY, COMMITTED BY ORGANIZED CRIMINAL  



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                                                          AB 819 (Calderon)
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          ENTITIES?

                                                                (CONTINUED)



          SHOULD THE INTELLECTUAL PROPERTY PIRACY PREVENTION AND PROSECUTION  
          FUND BE CREATED WITHIN THE CONTROLLER'S OFFICE TO, UPON APPROVAL OF  
          THE ATTORNEY GENERAL, REIMBURSE LOCAL LAW ENFORCEMENT FOR THE COSTS  
          OF PROVIDING SUBSTANTIAL ASSISTANCE TO THE OCIP IN INTELLECTUAL  
          PROPERTY PIRACY CASES, AS SPECIFIED?

          SHOULD THE NEW FUND BE ESTABLISHED WITH MONEY COLLECTED THROUGH THE  
          ENACTMENT OF AB 711 (CALDERON)?

          SHOULD ALL FUNDS FROM PROSECUTIONS BY OCIP BE DEPOSITED IN THE NEW  
          FUND?


                                       PURPOSE

          The purpose of this bill is to 1) create in the Office of the  
          Attorney General the Division of Organized Crime and  
          Intellectual Piracy (OCIP) to investigate and prosecute  
          intellectual property piracy, as specified; 2) establish the  
          Intellectual Property Piracy Prevention and Prosecution (IPPPP)  
          Fund within the Controller's Office; 3) establish the IPPPP Fund  
          through money collected under AB 711 (Calderon); 4) use the  
          IPPPP to reimburse local law enforcement for the costs of  
          providing substantial assistance to the OCIP, as specified; 5)  
          provide that all fines in OCIP cases be deposited in the IPPPP  
          Fund; and 6) require an annual report to the Legislature.

           Existing law  states legislative intent to provide local law  
          enforcement and district attorneys with the tools necessary to  
          successfully interdict high technology crime.  According to the  
          federal Law Enforcement Training Center, states will see a  
          tremendous growth in high technology crimes.  High technology  
          crimes are those crimes in which technology is used as an  
          instrument in committing, or assisting in the commission of, a  
          crime, or which is the target of a criminal act.  (Pen. Code   



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          13848, subd. (a).)

           Existing law  disperses funds through the High Technology Theft  
          Apprehension and Prosecution Program to ensure that law  
          enforcement is equipped with the necessary personnel and  
          equipment to successfully combat high technology crime,  
          including software piracy.  (Pen. Code  13848, subd. (b)(5).)

           Existing law  establishes the High Technology Crime Advisory  
          Committee (HTCAC) to formulate comprehensive written strategy  
          for addressing high technology crime throughout California, with  
          the exception of crimes that occur on state property or are  
          committed against state employees, and to advise the California  
          Emergency Management Agency (CalEMA) on the appropriate  
          disbursement of funds to regional task forces.  Priorities  
          identified include the apprehension and prosecution of criminal  
          organizations, networks, and groups of individuals engaged in  
          the creation and distribution of counterfeit software and other  
          digital information, including the use of counterfeit trademarks  
          to misrepresent the origin of that software or digital  
          information.  Priorities include persons and groups engaged in  
          the creation and distribution of pirated sound recordings or  
          audiovisual works or the failure to disclose the origin of a  
          recording or audiovisual work.  (Pen. Code  13848.6.)

           Existing law  requires the Director of CalEMA to appoint the  
          Chair and the following members to the HTCAC:

                     The California District Attorneys Association.
                     The California State Sheriffs Association.
                     The California Police Chiefs Association.
                     The Attorney General.
                     The California Highway Patrol. 
                     The High Tech Criminal Investigators Association. 
                     The representative of the agency of agencies  
                 designated by the DOF Director. 
                     The American Electronics Association to represent  
                 computer system manufacturers.
                     The American Electronics Association to represent  
                 software producers. 
                     The California Cellular Carriers Association.



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                     The California Internet Industry Alliance.
                     The Semiconductor Equipment and Materials  
                 International.
                     The California Cable Television Association.
                     The Motion Pictures Association of America.
                     Either the California Telephone Association or the  
                 California Association of Long Distance Companies.
                     The California banking industry.
                     The Office of Privacy Protection.
                     The Department of Finance.  (Pen. Code  13848.6,  
                 subds. (c)-(d).)

           Existing law  states that the HTCAC shall not be required to meet  
          more than 12 times per year, and may create subcommittees of its  
          own membership which may meet as often as the members find  
          necessary.  (Pen. Code  13848.6, subd. (e).)

           This bill  establishes the Division of Organized Crime and  
          Intellectual Piracy (OCIP) within the Office of the Attorney  
          General to investigate and prosecute intellectual property  
          piracy.

           This bill  establishes the Intellectual Property Piracy  
          Prevention and Prosecution (IPPPP) Fund within the Controller's  
          Office

           This bill  provides that the IPPPP Fund shall be established  
          through money collected under
          AB 711 (Calderon).

           This bill  provides that the IPPPP Fund shall be used to  
          reimburse local law enforcement for the costs of providing  
          substantial assistance to the OCIP in the prosecution of  
          intellectual property piracy and theft, including movie and  
          music piracy, trademark and copyright infringement, commerce in  
          counterfeit goods, as specified.

           This bill  provides that all fines in OCIP cases be deposited in  
          the IPPPP fund.

           This bill  requires an annual report to the Legislature.



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              RECEIVERSHIP/OVERCROWDING CRISIS AGGRAVATION IMPLICATIONS
          
          California continues to face a severe prison overcrowding  
          crisis.  The Department of Corrections and Rehabilitation (CDCR)  
          currently has about 170,000 inmates under its jurisdiction.  Due  
          to a lack of traditional housing space available, the department  
          houses roughly 15,000 inmates in gyms and dayrooms.   
          California's prison population has increased by 125% (an average  
          of 4% annually) over the past 20 years, growing from 76,000  
          inmates to 171,000 inmates, far outpacing the state's population  
          growth rate for the age cohort with the highest risk of  
          incarceration.<1>

          In December of 2006 plaintiffs in two federal lawsuits against  
          CDCR sought a court-ordered limit on the prison population  
          pursuant to the federal Prison Litigation Reform Act.  On  
          February 9, 2009, the three-judge federal court panel issued a  
          tentative ruling that included the following conclusions with  
          respect to overcrowding:

               No party contests that California's prisons are  
               overcrowded, however measured, and whether considered  
               in comparison to prisons in other states or jails  
               within this state.  There are simply too many  
               prisoners for the existing capacity.  The Governor,  
               the principal defendant, declared a state of emergency  
               in 2006 because of the "severe overcrowding" in  
               California's prisons, which has caused "substantial  
               risk to the health and safety of the men and women who  
               work inside these prisons and the inmates housed in  
               them."  . . .  A state appellate court upheld the  
               Governor's proclamation, holding that the evidence  
               supported the existence of conditions of "extreme  
               ----------------------
          <1>  "Between 1987 and 2007, California's population of ages 15  
          through 44 - the age cohort with the highest risk for  
          incarceration - grew by an average of less than 1% annually,  
          which is a pace much slower than the growth in prison  
          admissions."  (2009-2010 Budget Analysis Series, Judicial and  
          Criminal Justice, Legislative Analyst's Office (January 30,  
          2009).)


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               peril to the safety of persons and property."  
               (citation omitted)  The Governor's declaration of the  
               state of emergency remains in effect to this day.

               . . .  the evidence is compelling that there is no  
               relief other than a prisoner release order that will  
               remedy the unconstitutional prison conditions.

               . . .

               Although the evidence may be less than perfectly  
               clear, it appears to the Court that in order to  
               alleviate the constitutional violations California's  
               inmate population must be reduced to at most 120% to  
               145% of design capacity, with some institutions or  
               clinical programs at or below 100%.  We caution the  
               parties, however, that these are not firm figures and  
               that the Court reserves the right - until its final  
               ruling - to determine that a higher or lower figure is  
               appropriate in general or in particular types of  
               facilities.

               . . .Under the PLRA, any prisoner release order that  
               we issue will be narrowly drawn, extend no further  
               than necessary to correct the violation of  
               constitutional rights, and be the least intrusive  
               means necessary to correct the violation of those  
               rights.  For this reason, it is our present intention  
               to adopt an order requiring the State to develop a  
               plan to reduce the prison population to 120% or 145%  
               of the prison's design capacity (or somewhere in  
               between) within a period of two or three years.<2>

          The final outcome of the panel's tentative decision, as well as  
          any appeal that may be in response to the panel's final  
          ---------------------------
          <2>  Three Judge Court Tentative Ruling, Coleman v.  
          Schwarzenegger, Plata v. Schwarzenegger, in the United States  
          District Courts for the Eastern District of California and the  
          Northern District of California United States District Court  
          composed of three judges pursuant to Section 2284, Title 28  
          United States Code (Feb. 9, 2009).


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          decision, is unknown at the time of this writing.

           This bill  does not appear to aggravate the prison overcrowding  
          crisis outlined above.

                                      COMMENTS

          1.  Need for This Bill  

          According to the author:

               California remains the capital of the motion picture  
               and television industry as well as a center for the  
               recording and software industries.  In terms of  
               economic activity, television and movies generated a  
               total of $42.2 billion, split almost equally between  
               payroll expenditures and payments to vendors.  
               Approximately 266,000 people were directly employed in  
               the motion picture and television industry in  
               California, with an average salary of $80,600. When  
               indirect employment resulting from the industry is  
               factored in, the number of people working in  
               California as a result of television and movies totals  
               over 500,000.

               Although piracy is a global problem, a recent study by  
               the Los Angeles County Economic Development  
               Corporation (LAEDC) notes that it affects the L.A.  
               region disproportionately due to the concentration of  
               the entertainment industry there.  LAEDC estimates  
               that in 2005 losses to the motion picture industry  
               from piracy were $2.7 billion; the sound recording  
               industry $851 million; software publishing $355  
               million.

               Not only is digital piracy a direct threat to the  
               industry, but its effects are felt by state and local  
               government in the form of lost tax revenues.   
               According to the same LAEDC study, piracy affecting  
               the entertainment industry just in LA cost nearly $134  
               million in state income taxes; $63.5 million in sales  



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               taxes; $2 million in LA City Business Taxes.

               This is not just an LA problem. Digital piracy reaches  
               across the state, affecting the Silicon Valley and its  
               computer industry. According to the Business Software  
               Alliance, in 2003, software piracy alone cost the  
               California economy more than 13,000 jobs, $802 million  
               in wages and salaries, over $1 billion in retail sales  
               of business software applications, and roughly $239  
               million in total tax losses.

          2.  Late Amendments Rewrite the Bill  

          Prior to the amendments of July 9, 2009, the bill would have  
          created the Intellectual Property Piracy Prevention and  
          Prosecution (IPPPP) program, to fund grants for local law  
          enforcement and district attorneys for the purposes of  
          preventing and prosecuting intellectual property piracy.  The  
          bill would have established the IPPPP Advisory Committee to  
          devise strategy and propose grants from a fund that was also  
          established by the bill.  The entire program would be  
          administered by the Attorney General.  Implementation of the  
          program was dependent upon an appropriation.

          The program created in the previous version of the bill was  
          modeled on the High Technology Theft Apprehension and  
          Prosecution Program and the High Technology Crime Advisory  
          Committee (HTCAC).  The bill would have eliminated movie, music  
          and software piracy from the purview of HTCAC and transferred  
          those subjects to the new intellectual property program.

          The July 9, 2009, amendments eliminate the advisory committee  
          and create, instead, a Division of Organized Crime and  
          Intellectual Property (OCIP).  The OCIP is tasked with  
          investigating and prosecuting intellectual property crimes.  The  
          bill still includes creation of the Intellectual Property Piracy  
          Prevention and Prosecution (IPPPP) Fund within the Controller's  
          Office.  The Attorney General would direct payments from the  
          fund to local law enforcement entities that provided assistance  
          to the OCIP in prosecuting intellectual property crimes. 




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          The July 9, 2009, amendments fund the IPPPP Fund through money  
          collected pursuant to
          AB 711 (Calderon), which is pending in Senate Appropriations  
          Committee.  The Revenue and Tax Committee analysis of the bill  
          states:  "[AB 711 is designed] to increase revenues ?by  
          requiring larger businesses that are not already registered, to  
          register with the Board and remit use tax on their untaxed  
          purchases from out-of-state retailers."  This bill and AB 711  
          are not joined or subject to a contingency.  The amendments also  
          require that any fines imposed in OCIP cases be deposited in the  
          IPPPP Fund.

          3.  Creating Financial Incentives for Law Enforcement to  
            Concentrate Efforts on a Particular Kind of Crime   

          This bill requires that fines in crimes prosecuted by OCIP be  
          deposited into the Intellectual Property Piracy Prevention and  
          Prosecution Fund.  This bill also directs the Attorney General  
          to reimburse local law enforcement for assistance to the OCIP in  
          investigating and prosecuting crimes within its mandate.  

          The use of a state fund to reimburse law enforcement for  
          investigation of a particular kind of crime and the deposit of  
          fines imposed in convictions for such crimes into the fund  
          raises issues concerning the creation of financial incentives  
          for law enforcement to concentrate efforts on one kind of crime  
          to the detriment of enforcement efforts in other crimes.   
          Funding for many law enforcement programs will be cut  
          considerably in the pending budget.  For example, the Bureau of  
          Narcotics Enforcement will receive millions less in this budget  
          year than in years past.

          Requiring a defendant convicted of an intellectual property  
          crime to pay fines into a fund for investigating and prosecuting  
          similar crimes can arguably be described as requiring a  
          defendant to pay restitution to a government entity for the  
          costs of investigating and prosecuting the crime.   
          Crimes other than intellectual property offenses may require  
          costly investigation by law enforcement.  Murders and sex crimes  
          are often costly to investigate.  Such crimes may involve  
          extensive forensic analysis - autopsies, medical examinations,  



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          DNA analysis, etc.  This bill would require defendants in one  
          class of crime to pay the costs of investigation.  A government  
          entity that incurs costs in prosecuting a crime is not a victim  
          of crime.  (People v. Torres (1997) 59 Cal.App.4th at pp. 3-5 -  
          trial court could not order defendant to pay restitution for the  
          costs of undercover drug buys.)

          Combined with the "bounty" of reimbursing law enforcement for  
          the cost of investigating intellectual property crimes,  
          requiring defendants to pay fines into the fund from which  
          reimbursement for investigation of intellectual property crimes  
          could significantly skew priorities for law enforcement.  This  
          may be particularly true in these very difficult fiscal  
          circumstances.

          DOES THIS BILL CREATE FINANCIAL INCENTIVES - THROUGH  
          REIMBURSEMENT FROM A STATE FUND AND DEDICATED FINES - FOR LAW  
          ENFORCEMENT TO CONCENTRATE EFFORTS ON INTELLECTUAL PROPERTY  
          CRIMES TO THE DETRIMENT OF INVESTIGATIONS INTO AND PROSECUTION  
          OF OTHER CRIMES?

          4.  Use of IPPPP Fund Money to Reimburse Law Enforcement for  
            Assisting the OCIP in Investigating and Prosecuting  
            Copyright Violations - Jurisdictional Issues  

          Federal law preempts state law in the area of copyright.  A  
          state criminal law affecting copyright interests must be  
          based in a valid subject for state law.  The most widely  
          used California music and movie piracy law requires a  
          person who distributes a musical or audiovisual work to  
          disclose the true name and address of the maker of the  
          work.  While prosecution under the California music and  
          movie piracy laws may effectively promote or protect the  
          owners of the copyright in music or movies, the California  
          law cannot directly protect copyrights.  In this regard, it  
          should be noted that the bill does also refer to music and  
          movie piracy generally. 

          SHOULD THE BILL BE AMENDED TO STRIKE THE REFERENCE TO  
          INVESTIGATION AND PROSECUTION OF COPYRIGHT VIOLATIONS, AS  
          FEDERAL COPYRIGHT LAW PREEMPTS STATE LAW?



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          5.  Recent Music and Movie Piracy Legislation - Piracy  
            Investigations by Industry Representatives  

          The Legislature has enacted a number of movie and music  
          piracy bills over the past five years:

                 AB 64 (Cohn) - Ch. 9, Stats. 2006, expanded the  
               felony in the true name and address music piracy law.   
               California can make no direct copyright infringement  
               statutes, as federal law preempts state law in this  
               regard.  Instead, California law makes is a crime to  
               fail to disclose the true name and address of the  
               maker of a sound recording.  Music and movie pirates  
               are unlikely to include their true name and address on  
               pirated CDs. DVDs and other recordings and audiovisual  
               works.

                 SB 1506 (Murray) - Ch. 617, Stats. 2004,  
               essentially extended the true name and address law for  
               hard-copy musical or audiovisual works to electronic  
               distribution through Internet file sharing.

                 SB 1032(Murray) - Ch. 670, Stats. 2003, defined the  
               misdemeanor crime of recording a motion picture in a  
               theatre without the express permission of the owner of  
               the theatre.  The illicit recording of movies in  
               theatrical release was the subject of a well-known  
               "Seinfeld" episode - "The Little Kicks."

                 AB 2750 (Krekorian) - Ch. 468, Stats. 2008,  
               provided that in a music or movie piracy prosecutions,  
               the court can order the defendant to pay restitution  
               to a trade association (such as the Recording Industry  
                                                                                        Association of America - RIAA), if the trade  
               association suffered economic loss from the  
               defendant's crime.  AB 2750 specifically provided that  
               restitution includes the reasonable costs incurred by  
               the owner, producer or trade association to  
               investigate the piracy.




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          In discussions on each of these bills, industry representatives  
          noted that the music and movie industries make substantial  
          efforts to investigate piracy under existing laws.  The trade  
          associations employ investigators - often former law enforcement  
          officers - to investigate music and movie piracy.  The trade  
          associations also employ attorneys - often former prosecutors -  
          to organize and prepare the evidence that would be used in  
          prosecution.  The cases are then essentially turned over to  
          local law enforcement agencies and district attorneys for  
          prosecution.  Also, especially in music piracy cases, trade  
          associations have sued persons who have downloaded or  
          electronically distributed pirated music.  Trade association  
          lawyers vigorously pursue restitution claims following music or  
          movie piracy convictions.

          The music and movie industries have direct and substantial  
          financial interests in preventing piracy, punishing piracy and  
          obtaining restitution from those who illegally obtain or  
          distribute music and movies.  Arguably, a government-sponsored  
          piracy advisory organization and a program to fund piracy  
          investigations by law enforcement could be redundant of industry  
          efforts.  

          WOULD THE PROGRAM CREATED BY THIS BILL DUPLICATE CURRENT EFFORTS  
          AND ACTIVITIES OF MOVIE INDUSTRY COMPANIES AND TRADE  
          ASSOCIATIONS TO INVESTIGATE AND COUNTER PIRACY?


















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          6.  LAO's 2008-2009 Budget Analysis:  High Technology Theft  
            Apprehension and Prosecution Program - the Precursor or  
            Model of the Program Created by this Bill  

          The Legislative Analyst's Office (LAO) reviewed the High  
          Technology Theft Apprehension and Prosecution Program  
          (HTTAP) as part of the review of the 2008-2009 Budget.  The  
          HTTAP appears to be the model for the program that would be  
          created by this bill.  The LAO's analysis stated:


               Background. High technology crimes are defined as  
               being those crimes in which technology is used as an  
               instrument in committing a crime, or in which  
               technology is the target of a crime (examples include  
               computer hacking and intellectual property theft).  
               Historically, the High Technology Theft Apprehension  
               and Prosecution Program provided about $10 million  
               from the General Fund to support five local high  
               technology crime task forces, and two related database  
               and training projects. 


               In 2001, the Legislature expanded the program to  
               include five regional identity theft units that focus  
               solely on identity theft crimes. As a result, funding  
               for the program increased to $13.3 million from the  
               General Fund. Under the program, equal grant  
               allocations go to high technology task forces in  
               Marin, Los Angeles, Sacramento, San Diego, and Santa  
               Clara Counties (each task force gets about $2.5  
               million), with additional resources allocated to DOJ  
               and the California District Attorneys Association to  
               maintain a crime database and to provide training. The  
               General Fund portion of program funding has a 25  
               percent local government match, bringing total program  
               funds to $16.6 million. 


               Administration's Proposal.  The administration's  



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               budget proposes a 10 percent reduction in funding for  
               this program in the budget year (for a General Fund  
               reduction of $1.3 million).  The result would be  
               approximately $12 million of continued General Fund  
               support for the program, for total program funding of  
               at least about $15 million when the local matching  
               funds requirement is taken into account. 


               $10 Million in Spending Focused on 1,500 Victims.  In  
               2006-07, the program's high technology task forces  
               investigated about 1,000 crimes involving about 1,500  
               victims at a General Fund cost of $10 million.  This  
               means that on average, the state spent more than  
               $10,000 per investigation, or $6,800 per victim on  
               these types of crimes. The identity theft task forces,  
               which were funded with $3.3 million of General Fund  
               support, investigated about 1,400 cases statewide  
               which involved nearly 17,000 victims of identity  
               theft. This means that on average, the state spent  
               more than $2,300 per identity theft investigation, or  
               about $200 per victim. 


               LAO Recommendation.  As a result of the high cost to  
               the state of investigating each case, and to better  
               target funding in this program, we recommend that the  
               Legislature reduce total General Fund support to this  
               program by 25 percent ($3.3 million General Fund) by  
               reducing the funding provided for high-tech theft  
               cases. Our recommendation would hold harmless the  
               amount of existing funding to identity theft units and  
               to DOJ for the crimes database. This would result in  
               approximately $10 million General Fund support for the  
               program ($3.3 million for identity theft units, $6.7  
               million for other high-tech crimes units, and $60,000  
               to DOJ for crimes database).



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